US Household Wealth Ticks Up $2.3 Trillion to $94.8T - But This Is Wrong, Entirely Wrong

The Federal Reserve has issued its usual report upon changes in US household wealth, showing a small rise of $2.3T to a total of $94.8 trillion. As long as we understand what this number is it's fine, just fine, it's the measure of net financial assets held by US households. But if we want to try to use it as a measure of the United States it's wrong. And if we want to use it as the denominator when trying to measure wealth inequality, as Mssrs. Piketty, Saez and Zucman do, among others, then it's entirely, wholly, wrong. We should instead at that point look to other measures, like perhaps the total asset value of the country, or to human capital.

The reason it is important to understand the differences is this. Here is a picture of some of the poorest people in America:

CAMBRIDGE, MA - JUNE 4: Harvard University students attend commencement ceremonies June 4, 2009 in Harvard Yard in Cambridge, Massachusetts. Founded in 1636, this year marks the 358th year of graduation ceremonies at the university, considered the oldest in the nation. (Photo by Darren McCollester/Getty Images)

Brand new, newly minted, Harvard graduates are some of the poorest people in America. At least some of them are. And this is why we've got to distinguish between our different forms of wealth.

Household net worth rose to $94.8 trillion over the quarter, up from a slightly downwardly revised $92.5 trillion in the fourth quarter of 2016.

Isn't that just super? But there are other measures of wealth that we can be using. For example, we might look at the wealth of the country:

Total U.S. household and nonprofit assets amounted to $88.37 trillion as of September 2013.

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The Z.1 report also provides asset figures for nonfinancial businesses, the domestic financial sector (commercial banks, insurance companies, pension funds, etc.), state and local governments, the federal government and holdings of foreign owners).

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Total U.S. assets amount to about $225 trillion.

For some uses that's a better measure. for example, if we wanted to talk about wealth inequality should we use just what people directly own? Or what they also own a share of through being a citizen--for that would include the value of the Federal holdings of land and oil and so on. An interesting question really. But where this measure of wealth really fgoes wrong is with those Harvard students being poor.

At least some of them will have debts, student loans, but not other financial assets. They've thus got negative wealth and are, by the way we measure these things, the poorest of the poor. Yeah, right, a new Harvard graduate about to walk into a $100k Wall Street job is poor? But that is the way we measure things. For what we don't do is apply a value to that sheepskin--although it obviously does have a value, a value that our new grad is going to be renting out in the job market for many years to come. Which is why perhaps we should measure human capital:

Markets with service-based economies experience higher ratios, meaning the value of human capital further outstrips that of physical capital. The ratio is greatest in the UK, where, human capital (valued at $27 trillion) is 4.23 times higher than physical capital (valued at $6 trillion). The United States holds the human capital of greatest value, at $244 trillion. With physical capital valued at $62 trillion, the United States has the second-highest human capital ratio of the analyzed nations, at 3.92.

Like most economic statistics US household wealth is just a fine measure as long as we understand it properly. If we start to use it for other purposes we're going to find that it's wrong, just very wrong indeed, as a description of reality.